Reading 19: Foreign Exchange Parity Relations - LOS g ～ Q

relative, regarding, following, statements, class

Q1. Which of the following statements regarding relative Purchasing Power Parity (PPP) is least accurate?

A) In order for relative PPP to hold, countries with higher rates of expected inflation should see their currencies appreciate.

B) It claims that the exchange rate movements should exactly offset any inflation differential between two countries.

C) Because PPP holds in the long run, it is somewhat useful in exchange-rate determination in the short run.

Q2. Which of the following statements regarding relative purchasing power parity (PPP) is FALSE?

A) To keep the relative cost of goods and services the same across borders, countries with higher rates of expected inflation should see their currencies depreciate.

B) Short-term inflation differentials are insignificant in regards to exchange rates; only the long-run differentials are important to relative PPP.

C) If relative PPP holds, overvalued currencies will depreciate over time, while undervalued currencies will appreciate.

Q3. The law of one price is:

A) not dependent on the potential for arbitrage profits to hold in practice.

B) inconsistent with purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

C) consistent with absolute purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

Q4. The law of one price is:

A) not dependent on the potential for arbitrage profits to hold in practice.

B) inconsistent with purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

C) consistent with absolute purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.

Q5. Which of the following statements regarding purchasing power parity (PPP) is FALSE?

A) Relative PPP states that prices for goods and services are the same whether it is for one good or for a basket of goods.

B) Under absolute PPP the foreign price level expressed in domestic currency terms should be equal to the domestic country’s price level.

C) Absolute PPP is similar to the law of one price, except it concerns a basket of goods rather than a single good.